Margin Management

The interesting thing about the topic of margin management is that you need to know what your margins are before you can manage them. We’ve taught 100’s of companies how to manage their margins for over 10 years. And, of those companies, less than 5% of them knew how to properly calculate their Gross Margins. So, just like anything else, if you’re working with wrong data, you’re going to make wrong decisions.

So what’s the impact to you and your business if you’re calculating your Gross Margins incorrectly?

Lower sales conversion rates

Uncompetitive Pricing

Negative Cash Flow

Inaccurate financial forecasts

Poor financial decisions

Here’s a quick primer on the components of Margin Management:

Gross Profit is the difference between sales revenue and the costs directly associated with creating the sales – otherwise called Cost of Sales.

Cost of Sales is where the majority of businesses develop inaccuracies. All expenses directly created by the generation of sales revenue must be included in Cost of Sales. Not including all of them will artificially increase your Gross Margins, causing you to under-price your products and services.

Gross Margin expresses the relationship between gross profit and sales revenue. It is expressed as a percentage: the ratio of gross profit divided by sales revenue.

So Why Should You Care About Your Gross Margin?

Not knowing or working with inaccurate Gross Margin data puts you on your back foot in every negotiation you have with a client, no matter what business you are in. If you don’t know the cost of your products or services, then you may end up negotiating a pricing plan or a discount for an upfront payment plan that reduces, or maybe even actually eliminates your profit!

In addition to knowing your company’s Gross Margins, you’ll need to know the Gross Margins for each of your products and services. Then, when you are making a proposal to a potential client, you’ll know the products and services to include that will generate the highest profit for you. If it is strategically advantageous to make additional offerings to the prospect to close the sale, wouldn’t you want to know which offering will cost you the least and give you the most profit?

For a complimentary assessment to make sure that you’re calculating your Gross Margins for maximum profitability and cash flow: